Explaining Underperformance

Summary:

If you buy a company and it performs much worse than you expected, it's possible you weren't told something. But what if the economy went into recession at the same time? For this case, we had to analyze both a company and the economy as a whole. It wasn't easy.

A Deal Gone Sour:

Rakesh Singh had sold his high-end cosmetics company to David Saunders, a businessman who wanted to expand his portfolio to better avoid uncertainty. David paid $2 million up front, and would pay an additional $2 million over the next few years.

David was growing increasingly frustrated with his purchase. As the economy began to tank, the cosmetic company was losing serious market share. David felt that Rakesh had failed to mention various small details about various contracts.

David increasingly felt that he had been cheated and refused to pay the balance owed under their agreement. He argued that there were material errors in the information provided by Rakesh. This was crucial because the original contract specified that it could be upset if there were any material differences

Rakesh, on the other hand, felt as though he had done his best to provide all the data necessary for David to make his purchase. Rakesh commenced a law suit to collect the money due from David.

We were called in to analyze the company and see if a breach of materiality had happened. Materiality is the legal concept of whether or not something is significant.

Because of our experience with the field, and deep understanding of the issues at play, we managed to show conclusively that the decline in business was in fact because of the recession.